A 401(k) retirement plan is not an option; it's a must for all companies: Op-ed

Stuart Robertson, president of Capital One Advisors Spark 401k

9:52 AM ET Fri, 21 July 2017

CNBC.com

Mike Blake | Reuters

Eat healthy, exercise and get plenty of sleep. We all know these are good practices to follow, but probably (or definitely) don't do them all the time. The same can be said for small-business owners when it comes to 401(k) plans.

In fact, most small-business owners — 94 percent — who offer a 401(k) plan to employees recognize it supports recruitment and retention, according to the latest Spark 401k Small Business Retirement Planning Index. They also appreciate the tax advantages 401(k)s offer.

However, there are clear misconceptions about 401(k)s that appear to be holding many owners back from actually offering a retirement savings plan for their employees and themselves.

1. Any size business can offer a 401(k) — even self-employed.

The biggest obstacle holding small-business owners back is the idea that their business is too small to qualify for a 401(k) plan. More than half (59 percent) of small-business owners believe this, and the percentage jumps to 67 percent among owner-only businesses. It's simply not true. Whether you are owner-only and are opting for a solo-401(k), have a handful of employees, or operate with dozens of people, you can qualify for a solo, or group 401(k) plan.

2. To match or not to match — you get to decide.

Plan matching is another common misconception surrounding 401(k)s. Nearly a quarter of small-business owners — 22 percent — decline to offer 401(k)s because of concerns over affording employer-matching contributions. When offering a 401(k), small-business owners are not required to match employee contributions. You can still offer your employees the retirement benefit of a 401(k), while opting out of the match.

While some companies don't provide a match at all, others offer an annual profit share into the 401(k) based on business performance, and some offer a match that vests anywhere from zero to four years. There is a lot of flexibility here, and a company can always decide to start a plan without matching and then decide to add it down the road when it makes sense for the business. Just know it's certainly not a requirement. But if you do decide to provide an employer contribution, it's deductible for your business.

3. 401(k) costs are now lower than you think.

In terms of costs, 16 percent of small-business owners think plan costs are too high. A quarter of small-business owners — 27 percent — say they would reconsider offering a 401(k) plan if the overall costs were lower.

There is a lot of good news to share here. There are now 401(k) providers that offer pricing to fit almost any size company. Beyond a one-time setup, businesses typically will pay an ongoing administration or record-keeping cost, and other expenses are typically paid as part of participant investment expenses. For a 10-participant company, administration costs can be less than $1,000 per year, and the government offers a tax credit of up to $500 for the first three years of the plan to help offset plan costs. Self-employed business owners can expect much lower costs, although the credit won't apply.

One-third of owners said offering a 401(k) has afforded them both personal and professional tax breaks.

Many small business owners also believe five percent is a fair amount to pay for 401(k) fees, which can include investment expenses and administrative/service fees. The most important cost to manage is the investment expenses charged to participants, such as fund expense ratios and investment management services. Five percent is way too high. Every dollar paid in investment expenses is one less dollar invested in the markets. Keeping investment expenses under one percent is a good benchmark, and one you can achieve. With some online research, and asking a few questions around fund expenses and other costs paid by participants, you can quickly find some good options.

4. Top talent are attracted to companies with retirement benefits.

More than half of small-business owners — 52 percent — say offering a plan helps attract better quality employees. It makes sense: Employees who feel like their company is invested in them are more likely to be engaged in their work and have longer tenures within the company.

Employees are not afraid to make their voices heard. In fact, one-quarter of small business owners say that establishing a 401(k) plan was the result of employee demand and a similar percentage say departing employees frequently cite a lack of adequate retirement benefits as part of their reason for leaving.

When employees depart in search of companies with better retirement plans, owners can incur costs of roughly 25 percent of that person's salary during the time it takes to replace them. If some of that money could instead be reallocated to offering retirement benefits, it could ultimately go towards preventing turnover and further lowering company expenses.

5. Owners need retirement savings, too.

Offering a 401(k) is not only beneficial to employees, but also to owners. Right now, about half of small business owners — 47 percent — are saving less than 10 percent of their income for retirement. And even more startling, 25 percent are not saving anything at all.

In lieu of an established 401(k) plan, more than one-third of small business owners are relying on the sale of their business to fund their retirement. This increases to more than half among those with revenue of a half million or more. Selling your business to fund retirement runs the risk of being financially underprepared at a point where there isn't much time to invest in your savings.

While the sale of a business can certainly provide a cushion to your retirement savings (assuming you get the asking price you need), it can be a risky strategy to serve as your sole retirement plan. Small-business owners can better prepare for retirement by establishing a 401(k) plan and continuing to contribute to it throughout their career.

At the end of the day, the decision to offer retirement benefits for employees is a choice for small-business owners. By educating yourself and understanding the myths and misconceptions, you can position yourself to make an informed decision that helps you be retirement-ready, able to better manage taxes and is good for your employees and your company's bottom line.